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April 13, 2011

FT: Li & Fung warns of end of cheap China goods

Li & Fung warns of end of cheap China goods

By Rahul Jacob in Hong Kong

Published: March 24 2011 13:26 | Last updated: March 24 2011 19:18

Li & Fung, a Hong Kong-based consumer goods sourcing and logistics company, warned that “a new era in sourcing with higher prices” has begun, as manufacturers pass on the rising costs of both raw materials and Chinese labour to customers.

The supply chain company, which sources products for companies including Walmart and Gap of the US, and Debenhams of the UK, on Thursday reported a 27 per cent rise in profits to HK$4.28bn ($550m) for 2010.

Bruce Rockowitz, president of Li & Fung Trading, said: “The biggest topic on the minds of everyone in this business is that higher prices are really here to stay. At this point, retailers are not sure what they can pass on to consumers and what they cannot.”

William Fung, the company’s group managing director, said heightened competition for labour in China, which has resulted in wage increases of about 20 per cent this year, heralded the end of China-led deflation for the world economy.

The company said higher prices had historically been good for its trading business. “For the last 20 years, because prices were going down we had to ship more pieces [to keep revenues growing],” said Mr Rockowitz. The company’s core operating margins rose from 3.82 per cent in 2009 to 4.56 per cent in 2010.

The higher labour costs in China have prompted Li & Fung to move labour-intensive work on products such as garments to countries with lower wages, such as Bangladesh, Vietnam and Indonesia.

The company said that China was now responsible for only 25 per cent of Li & Fung’s clothing sourcing, and Mr Rockowitz said Bangladesh and Vietnam were rapidly gaining share of its clothing business.

In spite of this shift, China’s share of the company’s total sourcing rose from 54 per cent in 2009 to 57 per cent in 2010 because of a series of acquisitions last year.

At its results briefing, the company, which uses “stretch” targets in three-year plans, announced a plan under which it hoped to reach $1.5bn in core operating profit by 2013, 50 per cent higher than in the previous plan.

In 2010, the company acquired Visage, a UK-based private-label supplier, Jimlar Corp, a US-based footwear maker, and its sister company Integrated Distribution Services, a logistics provider, which it said would be responsible for $2.8bn in annualised turnover.